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N.C. House Committee Approves New Rules for Small Loans

Posted April 12, 2005

— A House panel Tuesday recommended a new fee structure for small loans the industry says will make it profitable again to issue them but consumer advocates argue would harm the working poor.

By a vote of 9-5, the House Financial Institutions Committee agreed to the industry-backed bill that would set up new rules for unsecured consumer installment loans of up to $1,200.

The state already regulates loans of up to $10,000, capping interest rates at 36 percent, with some fees.

This measure would allow consumer finance outlets to charge of up to 10 percent of the loan at the start, plus a monthly handling charge of 2 percent to 4.5 percent. Lenders also could collect late fees.

Industry officials acknowledge the effective annual percentage rates would be higher in most cases than under the current law, reaching nearly 125 percent in some cases. But they say they lose money under the current law on these loans.

Rep. Paul Miller, D-Durham, complained the measure appears to be "legalized loan sharking for the working poor." He voted against the measure.

But Rep. Tim Moore, R-Cleveland, said the new rules will give potential customers - often people without checking accounts - the chance to build up their credit, avoiding actual loan sharks.

"We are empowering people to enter the market," Moore said. "Here they can deal with a legitimate banking institution."

The state Attorney General's Office and consumer groups opposed the bill because the loan terms were worse compared to the current rules and it allows loan refinancing after 61 days. The state banking commissioner's office said 62,000 of these loans totaling $47 million were issued in 2003.

Josh Stein, head of the attorney general's consumer protection division, said the bill was more favorable compared to loans offered by payday lending outlets. The effective annual percentage rate for those short-term loans can reach ore than 400 percent.

Payday lenders, who have been largely unregulated in North Carolina since 2001, have taken an increasing share of these smaller loans in recent years.

If the loans under the proposed regulations can provide an alternative to payday lending, Stein asked industry representatives, "why don't you close the doors on the industry" and insert a ban on payday loans in the bill.

The bill now goes to the House Finance Committee for consideration.

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